Macquarie Equities Research (MQ Research) released a report on Thursday (10 Jan), summarizing the crude palm oil (CPO) statistics for December 2018. In a nutshell, although last month was uninspiring due to several factors, the recent cut on import taxes for palm products as announced by the Indian government saw CPO prices rebound approximately 20% to RM2,200 per tonne early this year.

Conclusion

• Malaysia’s palm oil stock-to-use (S/U) ratio for December 2018 (16.2%) continued to deviate from long-term average (5-yr: 10%) as inventory swelled to a new high 3.22mil tonnes (+6.9% month-on-month (MoM)), on:  (i) sluggish exports (+0.6% MoM to 1.38mil tonnes);  (ii) insignificant decline in production (-2.0% MoM to 1.81 mil tonnes vs historical avg. of 12% MoM); and  (iii) high level of palm oil imports (109k tonnes, -2% MoM).

Impact

• Production contracted. CPO production in December 2018 shrank by 2.0% MoM to 1.81mil tonnes, leading to a 2% year-on-year (YoY) fall in total production for 2018 to 19.52mil tonnes. While the decline is in-line with seasonality, the quantum is much smaller vs the 5-year historical average of -12% MoM. MQ Research believes this could be due to shifts in weather patterns in Malaysia through the year.
• Weak exports. There was a marginal increase in export volume in December 2018 (+0.6% MoM to 1.38mil tonnes), supported by India (+17.3% MoM) and China (+55.6% MoM). However, total exports for the full year were still uninspiring, registering a 0.4% decline year-on-year (YoY) to 16.48 mil tonnes. China imported 3% less YoY to 1.86mil tonnes, while EU was down 4% YoY to 1.91mil tonnes. This was partly offset by a jump in exports to India (+24% YoY to 486k tonnes). While this may come as a surprise in view of the high tariff the government imposed (>40%), note that India imported much less in 2017, hence, the low-base effect.
• Inventory reached a new peak. Despite weaker production and a slight improvement in exports in Dec 2018, they were insufficient to suppress the inventory level, bringing it to an all-time high at 3.22mil tonnes (+10.1% YoY, +6.9% MoM). MQ Research believes local players are still importing discounted palm oil from Indonesia, resulting in 51% YoY increase in imports to 841k tonnes.

Outlook

The industry had a fairly good start to 2019 as prices rebounded to RM2,100–2,200/tonne (up 10-20%) following the announcement by the Indian government to cut its import taxes on palm products. That said, MQ Research thinks the cuts are not sufficient to drive inventory down meaningfully—tariff on CPO was reduced from 44% to 40%, while refined palm products from Malaysia now have a new (preferential) tariff of 45% (Indo 50%) from 54% previously.

MQ Research believes bigger cuts are required to potentially bring exports to historical levels, especially with other vegetable oils overcrowding the market. MQ Research believes Indo’s biodiesel programme will continue to soak up CPO.

In addition, as production momentum tails off, MQ Research thinks near-term downside risks are limited. However, in the absence of major catalysts, MQ Research prefers defensive players like IOI vs other Malaysian players, given its strong operating track record and low sensitivity to CPO prices thanks to its downstream exposure.

Regionally, MQ Research likes First Resources for its high production growth and London Sumatra for its attractive margins.

Source: Macquarie Research - 15 Jan 2019